A guide to personal guarantees for business borrowing

Purchasing a fleet of vehicles could help a business grow, but companies may lack the funding to do it.

That’s where fleet financing comes in.

There is an increasing move towards electric vehicles (EVs) for commercial and personal use.

According to Zapmap, at the end of 2016, only 0.4% of all new vehicle registrations were electric.

By 2022, that percentage had increased to 16.6% of new car registrations.

In addition, as of the end of May 2023, there were over 780,000 fully electric cars and 500,000 plug-in hybrids on UK roads.

Ultra Low Emission Zones (ULEZ), Clean Air Zones, and Low Emission Zones

Greater uptake in electric vehicle adoption could be, in-part, being driven by adoption of Ultra Low Emission Zone (ULEZ) in London, Clean Air Zones in cities such as Birmingham, Sheffield, and Bristol as well as Low Emission Zones in some Scottish cities like Edinburgh and Glasgow.

These zones have been set up to help reduce air pollution.

In Greater London for example, the London Atmospheric Emissions Inventory suggested that road transport is the single biggest contributor of nitrogen dioxide and particulate matter emissions in the city.

If you use an internal combustion engine (ICE) vehicle to travel through the ULEZ, Clean Air Zone, or a Low Emission Zone you'll need to pay a fee if your vehicle exceeds a certain threshold for emissions.

In order to pay you'll need to set up an account with the relevant authority such as Transport for London for ULEZ, Gov.uk for a Clean Air Zone, and Low Emission Zones Scotland for Low Emission Zones.

This has provided an incentive for many businesses to consider upgrading their commercial fleet to electric vehicles.

Benefits of using Electric vehicles for your business

Switching to a fleet of electric vehicles could also bring other benefits to businesses, including demonstrating a commitment to the environment and saving money on fuel.

Find out more about moving towards a sustainable business by reading our five sustainable business myths, busted.

Commercial fleet financing can help businesses access electric vehicles, as well ICE vehicles.

Commercial fleet financing options

The main fleet financing options available in the UK are:

Contract hire

Through contract hire (also known as leasing), you get access to vehicles in return for fixed rental payments over a set period.

You return the vehicles at the end of the rental period.

Leasing can be a low-risk and cost-effective way to access vehicles because you pay for the vehicle’s depreciation for the lease period rather than the total value.

There may be tax benefits, too.

Depending on whether the vehicle is used for business use only the level of carbon emissions, and how eco-friendly the vehicles are, you can claim up to 100% VAT back and offset up to 100% against corporation tax.

There are some potential downsides to leasing.

When you return a vehicle, it will be inspected, and if its condition is considered to be beyond ‘fair wear and tear’, you will have to pay for repairs.

Many leasing companies follow the British Vehicle Leasing and Rental Association’s Fair Wear and Tear guidelines.

You may also have to pay an extra fee if you have exceeded the agreed mileage levels.

Finance lease

Using a finance lease, you either pay the total cost of the vehicle in monthly instalments or have lower monthly instalments and make a final payment at the end of the lease based on the vehicle’s expected resale value.

When the contract ends, you can either sell the vehicle to a third party approved by the leasing company and keep any proceeds or extend the agreement for what is known as a “peppercorn rental”.

Once that period ends, the vehicle must be sold.

A finance lease is usually more flexible than a contract hire, and you will receive any profits when the vehicle is sold.

There are also similar tax benefits for contract hire.

Potential disadvantages of finance leases include additional payments needing to be made if the vehicle is sold for less than the value estimated at the start of your agreement.

Hire purchase

Using hire purchase, you buy a vehicle by making fixed payments and interest during a specified period.

At the end of the contract, you own the vehicle.

Hire purchase involves an initial deposit, followed by monthly payments.

Possible benefits of hire purchase include accessing newer and better vehicles than you might be able to afford if you bought a vehicle with your own funds.

Potential downsides include that monthly payments are based on your credit rating, which could mean high charges, and you risk a negative impact on your credit score if you miss a payment or pay late.

Outright purchase

This involves directly buying a vehicle using your own funds or getting a loan.

You will fully own the car and not be subject to contract fees or changes.

Potential downsides of outright purchase include a high upfront cost which could impact your cash flow, and you have to maintain the vehicle yourself, which adds extra costs.

How to choose the right fleet financing option

To select the right fleet financing option for your business, you need to consider questions including:

• what level of vehicle ownership do you require, such as rental or outright ownership?
• what types of vehicles do you need?
• how will you use the vehicles?
• who will use the vehicles?
• what level of monthly payments can you afford?
• what is the best fleet financing method most relevant to your needs?
• what are the tax implications or benefits of fleet financing for your business?

Where to find fleet financing

Before committing to fleet financing, it’s a good idea to do your research to find the best deal for your business.

Search online for fleet finance providers, vehicle dealers, and manufacturers that offer vehicle finance.

Compare interest rates and fees to determine which suits your needs and budget best.

Speak to fellow business owners for recommendations, ask your connections on platforms like LinkedIn for tips, research customer reviews online and visit price comparison services.

You can also consult the Finance & Leasing Association website for advice.

As with all financial decisions its worth seeking independent and specialist financial advice as individual circumstances will vary.